Most people do not realise the impact of the different type of debts and how they affect your loan application.
When the lenders look at a loan application they are very focused on a number of things including affordability. They will calculate your ability to have a loan on your income less any living expenses and existing financial expenses and this gives the “surplus” and that determines if you have enough to meet the repayments.
Often with loan applications these are just done online using automated systems, so there is nobody actually reviewing your application.
Smarter Loans Review Applications First
We’ve heard that many of these automated loan application systems have a poor rate of approvals, with a large number being declined or approved for lower amounts because the “system” has found some debts and after applying the calculation for “deemed repayments” the loan applied for is no longer affordable.
Here at Smarter Loans we believe that it’s much smarter to spend a little time to review the loans before submitting them for an approval. It can delay the application a little bit, but it is proving to lead to more successful approvals – definitely worth the effort!
We will review your application and check it against your credit report to ensure that all active loans are listed, and we will check back with you if we find that you have some credit facilities that you may have forgotten about, or some like the buy now pay later which you probably had assumed were paid off and closed.
Review Your Debts Before You Apply
Lenders will include any active credit facilities in your application when testing what you can afford.
It’s therefore a good idea to get a copy of your credit report and see what is listed as active, and that can include debts that are paid and you probably assumed were closed. When you find these you should cancel any that you don’t use or need.
You are welcome to contact us if you need help with this too.
We can help you understand how any debts may affect your loan application, and can also look at arranging a debt consolidation loan too if that would help you save money overall.
Know The Impact Of Those “Other” Debts
It’s therefore important to understand how the lenders calculate the financial commitment of the various types of debts:
- Credit Cards – the banks calculate the monthly financial commitment at 3.8% of the limit not what is actually owing. In the case where you may have limits that total $10,000 then that would mean the financial impact is a deemed monthly expense of $380 regardless if you owe just $6,000.
- Store Cards – they are treated the same as credit cards so the banks calculate the monthly financial commitment at 3.8% of the limit not what is actually owing. In the same case where you may have limits that total $10,000 then that would mean the financial impact is a deemed monthly expense of $380 regardless again if you owe just $6,000.
- Buy Now Pay Later – is one of the new type of debts and the banks calculate the monthly financial commitment at 5.0% of the limit not what is actually owing. Using the same case where you may have limits that total $10,000 then that would mean the financial impact is a deemed monthly expense of $500 regardless if you owe just $6,000.
- Personal Loans – the banks will use the actual amount of the repayment which of course is more accurate. Using the same case where you may have limits that total $10,000 then if the $6,000 owing was a personal loan then even at a typical bank interest rate of 12.90% (over 5-years) that would mean the monthly expense is $136 and you may still have a credit with a limit of $4,000 and nothing owed then at 3.8% that is $152 meaning a total monthly expense used of $288 which is considerably less than the other options.
For more about the Buy Now Pay Later you can read this article on the Hidden Risks With Buy Now Pay Later and learn more about the problems with these loans. They are causing issues with people being declined for other loans without knowing why.
